Foreclosures in Florida, one of the states hardest hit by the housing crisis. Photograph: Joe Raedle/Getty Images

The US states hardest hit by the housing collapse will decide today whether to sign off on a potential $25bn settlement with America's biggest lenders, the largest industry fine since 1998's massive multi-state agreement with the tobacco industry.

Government officials have been trying for over a year to negotiate a settlement with states to agree to a package of loan write-downs, refinancings and other homeowner assistance, as well as cash penalties for some of the US's largest lenders.

California, the state with the most homeowners now in negative equity, quit talks last year but is now back in negotiations. The multi-state deal deadline is today.

New York attorney general Eric Schneiderman, another former critic, has also signaled that he may now be willing to sign off on an agreement. President Barack Obama recently appointed Schneiderman to head a new financial crimes unit dedicated to investigating and prosecuting financial fraud.

The banks – led by the five biggest mortgage servicers, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – hope a deal will put a halt to a series of lawsuits and investigations into alleged abusive practices by several states including so-called "robo-signing" where banks foreclosed on borrowers without proper paperwork or process. Four million families have lost their homes to foreclosure since the beginning of 2007.

While final details are not available, borrowers are reportedly expected to receive roughly $1,500 each, depending on how many people file claims. Most of the money would be taken by reductions in the debt and other benefits for financially distressed homeowners. Housing and Urban Development (HUD) secretary Shaun Donovan recently estimated US homeowners owed $700bn in negative equity.

The accord, which must be approved by a federal judge, is expected to protect banks from future legal claims brought by states tied to their activities during the recent housing boom and bust.

Several states, including Arizona, New York and Massachusetts, have already sued banks over their home loan activities. Those cases would probably have to be settled as part of an agreement. Many of the objections from state attorneys general have centered on the scale of the banks' liability release.

Goeorge Goehl, executive director of non-profit National People's Action said a settlement was a step in the right direction but "$25bn is a drop in a very big bucket."

"We are swimming upstream against 30-years of financial deregulation," he said. "We need the full power of the law."

But James Tierney, director of the National State Attorneys General Program at Columbia Law School said the settlement was "a very big deal" and would fundamentally change the accountability of banks.

The housing boom coincided with a boom in the "securitization" of mortgages – home loans from many different states were packaged together and sold as investments. The scheme allowed banks to argue individual states could not sue them as national organisations. That is a loophole Tierney expects to close under any agreement.

"This is a settlement of cases, it's not legislation, not a mechanism for economic justice," he said. "There is no question there will be more accountability. Will they be as accountable as Move On want them to be? Probably not."

Kathleen Day, spokeswoman for Washington-based non-profit the Center for Responsible Lending, said: "From what we hear the proposals look significant if not perfect. They would end robo-signing but still allow the ability to bring criminal cases and hold banks accountable."

The settlement would be the largest multi-state agreement with an industry since 1998's Tobacco Master Settlement Agreement (MSA) in which states agreed to drop law suits against tobacco firms in return for $206bn over 25 years. Thats settlement has proved controversial with critics charging it offered the industry too much protection and that the money has not been used to fund tobacco prevention and cessation programmes .